Stocks

(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own)

By George Hay and Neil Unmack

LONDON, Nov 29 (Reuters Breakingviews) - Spain’s bank
haircuts are part bail-in, and part bail-out. The indebted
government has lopped 10 billion euros off its euro zone-funded
bank rescue bill by cutting the value of its worst lenders’
hybrid debt. Yet if it hadn’t been for political considerations,
the burden-sharing might have been greater.

Take Bankia (BKIA.MC), the biggest of the four so-called
“Group One” banks that required the biggest slug of government
support. It has handed haircuts of 14-to-46 percent of par value
to the holders of its 6.5 billion euros of hybrid debt. When
Ireland haircut the holders of similar instruments issued by
Allied Irish Banks in January, 2011, the number was a more
brutal 70 percent.

The comparative kid-gloves approach is driven by politics,
itself the result of the lenders’ approach to selling their
hybrid bonds. A large amount of the debt was in the form of
preference shares that were sold to the banks’ depositors. Those
retail investors are already battling with the consequences of
austerity and the Spanish recession. The Irish hybrid debt
holders, in contrast, were mostly institutional investors.

The Spanish workaround is to combine a smaller haircut with
equity stakes in the bank. Taking into account the haircut and
new securities, creditors will receive between 30 and 70 percent
of the original investment - for the lowest-ranking prefs and
perpetual securities --, and 90 percent for higher-ranking dated
subordinated debt, says the Bank of Spain. That looks like a
cushy deal for creditors, although giving them equity does mean
they remain on the hook for further losses.

However, if the bailout, and further action from the
European Central Bank, help Bankia and its peers recover,
Spain’s lenient haircut and the debt-for-equity combination
would look like a significant subsidy for the hybrid holders.
The shares would appreciate, and the state’s stake in Bankia
will be diluted.

Ultimately, Spain didn’t have any choice over whether to
enforce the haircuts: they were a requirement for a 100 billion
euro bank rescue package in the summer. But had it regulated its
banks properly in the first place, depositors wouldn’t have
bought their banks’ hybrid debt in the first place. Yet another
reason why a euro zone banking union does look like a good idea.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:

www.breakingviews.com/TOPNewsSubscription

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CONTEXT NEWS

- The European Commission approved restructuring plans for
four Spanish banks on Nov. 28, confirming that the lenders’
recapitalisation and reorganisation were in compliance with
European Union state aid rules. The four lenders - BFA/Bankia,
NCG Banco, Catalunya Banc and Banco de Valenci, which form the
so-called “group one” banks that relied most heavily on state
support - will receive 37 billion euros of European bailout
cash.

- Under the restructuring proposals, banks will force losses
on junior creditors, including preference shareholders, by
haircutting the nominal amount owed, and swapping the residual
amount for equity.

- This burden sharing will reduce the total amount of
capital injected into the banks by the Spanish government by 10
billion euros, the European Commission said in a statement.
“The absorption of losses borne by the banks and their
stakeholders will ensure, together with the restructuring
measures, a satisfactory burden-sharing and an adequate own
contribution to the financing of the significant restructuring
costs,” the statement said

- The burden-sharing proposals require preference
shareholders and perpetual subordinated bondholders to take a
haircut, and receive a portion of equity for the residual amount
of their claim. Holders of dated subordinated debt will take a
haircut, and choose between receiving senior debt, or equity.
Bankia, the largest of the four banks, said that preference
shareholders will receive a haircut of 31 percent and receive
shares at a price of 61 percent of the nominal value of their
claim. Perpetual bondholders will get shares worth just 54
percent. Holders of dated subordinated debt will take a haircut
of 14 percent, and receive either shares or new bonds worth 86
percent of the nominal claim.

- Bankia is to cut 6,000 staff, over a quarter of its
workforce, and close 39 percent of its branches as part of the
restructuring.

(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.